He didn't amount to a hill of beans

Saturday 12 June 2004 20.05 EDT
First published on Saturday 12 June 2004 20.05 EDT

The story goes that Ronald Reagan was the first choice for the role of Rick in Casablanca but luckily he was on loan to another studio and a different B-movie actor got the part. Humphrey Bogart graduated to A-movie status - not least because of his role as deputy for Reagan in one of the greatest films of all time - and Reagan stayed in B-movies until he moved on to gubernatorial and presidential roles.

Just imagine! Casablanca with Reagan as Rick! Bogart as President? No, to be honest, I don't care for all that fashionable 'what if' stuff.

To return to what actually happened: Reagan certainly played an important part in ending the Cold War, and has been rightly praised for this, if in somewhat hyperbolic fashion. But his contribution to economic and social policy - Reaganomics - was far less constructive, and has left a damaging legacy to this day.

It appears that Reagan was an admirer of Margaret Thatcher even before he became President. According to one BBC report the Gipper expressed a desire in 1980, while campaigning for the Presidency, to emulate Thatcher by 'getting the government off the backs of the people'.

The fact that civilised countries need governments, and that there would never have been a vacancy for the likes of Reagan and Thatcher in the absence of 'big' government, seems to have passed the great transatlantic couple by. Unfortunately, the right-wing instincts of Reagan and Thatcher fed upon each other, and when communism did collapse in the USSR and eastern Europe, it was at the height of what has been termed 'bourgeois triumphalism', with all that entailed for the mishandling of the former Soviet bloc's transition to a market economy. The Chinese were wiser economically and, despite their dubious record on human rights, seem to have conducted a smoother transition. (Indeed, it may only be a short time before the Group of Eight leading industrial countries face reality and invite China to make up the new Group of Nine.)

In an understandable effort to rub in once again just how appalling are the economic policies of George W Bush, the distinguished US economist and New York Times columnist Paul Krugman has reminded us that, by comparison, the champion of Reaganomics was not so bad. 'President Reagan,' writes Krugman, 'confronted with evidence that his tax cuts were fiscally irresponsible, changed course. President Bush, confronted with similar evidence, has pushed for even more tax cuts.'

Yes, but we should never forget that there was a fundamental flaw at the heart of Reaganomics, namely the idea, epitomised by the infamous Laffer Curve, that tax cuts would pay for themselves via the 'incentive effect'.

The truth was that Reagan's 'supply side' doctrine was a crude and intellectually shabby attempt to justify tax cuts for the great B-movie actor's backers, namely the exceedingly rich. Taxes as a per centage of income came down from 48.6 to 38.9 per cent between 1980 and 1984 for those with incomes above $250,000 a year. And the way in which certain tax exemptions were removed - Reagan's attempt to be fiscally 'responsible' - led to a rise in the proportion of income tax paid by the lowest income groups. In most eulogies to Reagan last week, all those US cuts in government expenditure on food stamps, school lunches, welfare, Medicaid and subsidised housing were quietly forgotten.

As usual, the one and only Professor JK Galbraith put his finger on it when he said there was something strange about a doctrine which held that the rich would work harder if they had more money and the poor if they had less - a doctrine that was happily supported in this country by Mrs Thatcher and her Chancellor, my old friend Lord Lawson.

Reagan's ultimate lack of fiscal responsibility did his successor George Bush Senior no good. The latter had to renege on his famous promise 'Read my lips: No ... new ... taxes' and agreed, unlike Dick Cheney in conversation with former US Treasury Secretary Paul O'Neill, that there were times when deficits did matter.

I find there is widespread misunderstanding among the public about the Keynesian position on deficits. They do matter - to the point where they are absolutely essential during a recession, to prevent matters from getting worse - and can be useful in stimulating a recovery. But the kind of deficits acquiesced in by the George W Bush crowd during a rapid economic recovery are only storing up trouble for the future, as everybody except the emperor with no clothes seems to realise.

Which brings us to the economy presided over by Gordon Brown on behalf of the First Lord of the Treasury, Tony Blair.

It was in order to be able to commission badly needed increases in public spending that Gordon Brown made the Bank of England operationally independent. He did not want to be derailed by a 'bankers' ramp' resulting from the financial markets' exaggerated obsessions with spending programmes and deficits that, given the chance, ought to be financeable. He knew only too well that, historically, the markets seldom gave a Labour government the benefit of the doubt.

For seven years the Bank of England's monetary policy committee (MPC) has generally been considered a success story. It has had the good luck to be founded in a worldwide climate of low inflation (indeed amid occasional concerns about deflation, or falling prices). And it is widely credited with having managed demand so skilfully that it has avoided the kind of setbacks to economic growth - or outright recessions - that have been experienced by a majority of G7 countries. (The G7 remains the real forum of the advanced industrial countries. The relatively recent presence of Russia at the G8 is not replicated at the regular meetings of the G7 finance ministers.)

It is already part of MPC folklore that every member who retires from the committee tends to say it has had a lucky run and things are likely to become tougher. So far, so good. But in a country where one can hardly move without being asked about the sustained boom in house prices and consumer borrowing, the judgments of the MPC do seem to have become more difficult.

If one can cut through the endless undergrowth of commentary and speculation, one finds an MPC that, whatever it says about its duty to aim at a specific inflation target and not to worry about borrowing and house prices, is in fact obsessed by borrowing and house prices and speculative bubbles in that 'buy-to-let' market.

The MPC has deliberately pursued a 'softly softly' approach to interest rates since it became concerned about 'boom' rather than recession. The decision to raise rates only a quarter of a percentage point in May - instead of the half point that was considered - reflected this approach.

But the fact that the MPC - encouraged by a lot of speculation - decided to raise rates by another quarter point last week (to 4.5 per cent), a matter of weeks after its last inflation forecast, seems to me to be a sign of panic in the ranks.